WHAT IS AN LoU?

WHAT IS AN LoU?

Of late the term LoU has come into the limelight after Punjab National bank said it had been defrauded to the tune of about Rs 13,000 crore by using mainly this instrument. An LoU is a form of a bank guarantee that is issued by a bank to its client for securing foreign exchange from the overseas branch of another Indian bank. An LoU allows a banking customer, usually an importer into India, to obtain foreign exchange abroad at a cheaper rate than otherwise. In case of PNB, it had issued LoUs to diamond merchant Nirav Modi to obtain foreign exchange abroad to import rough diamonds into India. In the aftermath of the PNB scam, the RBI has banned the use of LoUs by Indian banks, a decision that has been criticised by importers, business houses and trade associations.